FUTURE TAX POLICIES SHOULD MAXIMIZE ECONOMIC GROWTH

November 21, 2006

The goal of tax policy should be to maximize economic growth. Tax policies that maximize growth would satisfy the stated goals of policy makers on both the right and the left, says Gerald Scully, a senior fellow with the National Center for Policy Analysis (NCPA).

Some activities of government contribute to economic growth. Yet when government becomes too large, it slows economic growth. The trick for policy makers, says Scully, is to find the point at which economic resources are allocated most productively between public and private uses. At this level of taxing and spending, the economy will grow at the fastest sustainable rate.

According to the Scully:

To maximize economic growth, federal, state and local taxes combined should average about 23 percent of gross domestic product (GDP).

However, tax revenues as a share of GDP have not been at that level since 1950, and for years have averaged between 30 and 34 percent.

Would Americans have had to sacrifice important government programs to keep the overall tax rate down? Not at all, says Scully. At a lower rate of taxation, higher growth would have produced more government revenue than the amount the government actually collected. For example, between 1950 and 2004:

Had the combined tax rate been held to the optimum 23 percent, the economy would have grown at a clip of 5.8 percent per year, rather than the 3.5 percent that actually occurred.

As a result, real GDP would have been $37 trillion by 2004, more than three times greater than it was, meaning the average American family would have more than three times as much real income today than it actually has.

Government at all levels would have collected $61.9 trillion more in taxes.